Loans Against a Policy. Many policies that have a cash value allow the insured to borrow against the cash value. If a loan has been taken against the policy, the company will typically refuse to allow the ownership of the policy to be changed to a revocable trust until the loan is re-paid. Although this restriction may effectively prevent the funding of the policy ownership, most companies will allow for the change of beneficiary designation. If you are able to repay the loan, you may want to consider repaying it so that the ownership can be re-titled to the trust. If repayment is not an option, then both changing the ownership and beneficiary designation may not be possible until a later date.
Funding Insurance Policies of Divorced Clients with Minor Children. If you are divorced with minor children from the former relationship, it will be important to ascertain whether the divorce decree requires you to maintain a life insurance policy on your life for the benefit of a minor child. This is a common provision in many divorce decrees and is intended to assure that adequate financial resources would be available to support or educate a minor child to emancipation. If the divorce decree imposes such a life insurance requirement, changing the beneficiary designation may result in a violation of the divorce decree. State law will control what options are available.
Regardless, if you are subject to an ongoing decree, you should consult with an estate planning attorney before taking any action to fund your trust. If a case is pending resolution, such as you or your spouse have recently filed for divorce, you should consult with an estate planning attorney. Often, the court will issue temporary orders which prohibit transfer of property, and the orders may prevent your funding your trust (and subject you to fines or imprisonment for contempt of court if you proceed).
A Policy is Collateral for a Loan, Occasionally, insurance policies are used as collateral for a loan from a bank or financial institution. The loan may take many forms including an educational loan or line of credit. Frequently, financial institutions require a borrower to assign their life insurance proceeds to the financial institution as collateral for the loan. Transferring the ownership or changing the beneficiary designation may result in acceleration of the loan repayment, in such cases.
Have your estate planning attorney contact the lender directly to ascertain what actions it will take if the policy is funded. Some lenders may allow the loan to be assigned to the trust while other lenders may require the old loan to be replaced with a new loan naming the living trust as the borrower. What action the lender takes will often depend on whether there has been a change in interest rates. Regardless of what option the lender accepts, it will most likely insist on reviewing an entire copy of the trust agreement to ascertain whether there are any restrictions in the trust document which prevent encumbering the trust property.
Be advised that there may be additional expenses charged by the lender for reviewing the trust document or preparing/reviewing an assignment to the trust. You should be prepared to assume any additional expenses related to the lender reviewing the trust document.
